With every home comes a mortgage, but the details are not set in stone. Here are 11 ways you can revamp your mortgage loan to work more in your favor.
1. Extend the length of your loan
Want to lower your monthly payments? You can when you refinance. Extending the life of your loan will allow you to stretch the total payment over a larger period of time, reducing the amount owed each month. Keep in mind that you will end up paying more in overall interest.
2. Shorten the length of your loan
Have extra cash and want to pay your mortgage off faster? Not only will shortening the length of your loan quicken the removal of a mortgage off your ledger, but it will also save you big in the long run as well. Interest gets expensive and not having to pay a lot of it can save you hundreds of thousands overall. Remember, condensing the loan means much higher payments, so only do it if you can afford it.
3. Get a fixed rate
Want to take the guesswork out of what you will need to pay each year for your mortgage? Lock it up with a fixed rate for the length of your loan. The rate may be a bit higher than an adjustable, but you won't have to worry about having your payments go through the roof because the bank raised your rates. You are more or less in control of your payments.
4. Get an adjustable rate
Adjustable rate mortgages, or ARMs, typically have lower rates than fixed mortgages, giving you lower monthly payments. This can open the door in the beginning to buy homes that are otherwise out of your price range. As you earn more over the years, when the rate eventually goes up, you will be able to keep up with the increased monthly payments. However, be aware that an ARM is out of your control and can fluctuate from year to year. You could be put in a bad spot if you're not ready to deal with increased payments.
5. Remove your Private Mortgage Insurance
If you bought your house with little to no money down, you were bound by law to buy private mortgage insurance (PMI). PMI helps protect lenders from loan defaults by borrowers. If you have paid a part of the loan balance and your home value has increased, a refinanced mortgage could give you the ability to get rid of the PMI and therefore, another expense.
6. Get extra funds fast
When you begin to own more and more of your home, you begin to build up equity. An increase in your home's value also adds to the equation. Using these factors to your advantage, you can refinance your mortgage to exchange your equity for large lump sums of cash immediately. This can be put to good use to pay large bills, make further improvements to your property, or put into long term investment.
7. Get a cash out refinance
A cash out refinance is taking your existing mortgage loan and replacing it with a larger one. The benefit is that the value difference between the two is what you get in cash. This can also allow for a lower interest rate. A negative associated with a cash out is closing costs. There are none with a home equity loan.
8. Remove a co-signer from your loan
Maybe at the time when you bought your home you weren't making enough, your credit was poor, or you simply could not meet the requirements, so you needed a cosigner to make the loan viable. If your financial situation has improved and you want your cosigner removed from your loan, you can do it by refinancing your loan to be only in your name.
9. Make a 13th payment on your loan
Why would you want to do that exactly? The main reason is principal. If you are caught up with your current payments, you can send a separate check and specifically write in the memo that it is solely for paying off principal. In doing this, you reduce the amount of interest that you will have to pay over the life of your loan.
10. Pay a little extra each month
Maybe you want to additionally pay down your mortgage a little bit at a time. It might not do much at first, but over time, an additional hundred dollars a month towards your remaining principal can pay huge dividends in significantly reducing your interest payments and the length of your loan term. Smaller payments make it easier for those with a tighter budget as well.
11. Have an escrow account
When purchasing a house and acquiring a mortgage, you can typically set up an escrow account with the bank, which guarantees that your insurance and real estate taxes are paid monthly and on time. If you do not have an escrow account, you will have to closely manage your finances and then pay lump sums of the insurance and tax all at once. If you are a poor manager of your finances, it may be best to leave these payments in the hands of an escrow account.